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Volkswagen Fair Value Estimation

In our opinion, the market has been overly punitive in assessing technology spending and costs from the diesel emission scandal and the EC collusion charges. Even though the worst of the cheating scandal is over in the U.S., we maintain a EUR 20 billion reduction to our enterprise value for potential litigation in Europe. If we remove the EUR 20 billion EV haircut, our FVE would be EUR 280.

Our fair value includes margin contraction from higher spending for industry-disruptive technologies, including mobility, autonomy, and electrification. In 2018, VW achieved a 7.2% EBIT margin (excluding China JV equity income). The historical 10-year high is 7.4% (2017). We assume average EBIT margin of 6.1% during our five-year forecast, with a midcycle assumption of 4.9%, 120 basis points below the historical 10-year median of 6.1%.

Diesel collusion allegations: We estimate that if Volkswagen’s worst-case fine of EUR 23.6 billion were to be levied, our fair value would drop to EUR 188 from EUR 238. In this scenario, under current trading conditions, Volkswagen stock would be rated 3 stars, with the market at a 10% discount

Volkswagen AG manufactures and sells automobiles primarily in Europe, North America, South America, and the Asia-Pacific. The company operates in four segments: Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering, and Financial Services. The Passenger Cars and Light Commercial Vehicles segment develops vehicles and engines, and light commercial vehicles; and produces and sells passenger cars and related parts. The Commercial Vehicles segment develops, produces, and sells trucks and buses; and offers parts and related services. The Power Engineering segment offers large-bore diesel engines, turbomachinery, special gear units, and propulsion components. The Financial Services segment provides dealer and customer financing, leasing, banking and insurance, fleet management, and mobility services. The company also offers motorcycles. It provides its products under the Volkswagen Passenger Cars, Audi, ŠKODA, SEAT, Bentley, Porsche, Volkswagen Commercial Vehicles, Scania, MAN, Lamborghini, Ducati, and Bugatti brands. Volkswagen AG was incorporated in 1937 and is based in Wolfsburg, Germany. Volkswagen AG operates as a subsidiary of Porsche Automobil Holding SE.

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

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Dividend Stocks Shares

Abbott Laboratories Reduces Outlook for Pandemic-Related Diagnostics

We’d already seen a foreshadowing of softening demand for COVID-19 diagnostic tests as reference labs LabCorp and Quest Diagnostics had indicated that SARS-CoV-2 testing volume peaked in mid-December and then steadily declined through to the end of the first quarter. Considering the penetration of COVID-19 vaccination in the United States and a falling caseload in the last couple of months, we anticipate further decreases in PCR testing through the rest of this year at the labs.

The big question is to what degree demand for COVID-19 PCR testing could shift to the point-of-care, rapid antigen tests that Abbott has supplied. The U.S. government made bulk purchases of those antigen tests last year, and the test recently became widely available over the counter. However, gains in vaccinating adults and now teens in the U.S. are taking place quickly, reducing the need for rapid antigen tests. Abbott now expects $4 billion-$4.5 billion in

COVID-19 test sales in 2021 (down from the $6.5 billion it expected earlier this year), which is closer to our $4.5 billion estimate. We continue to project the diagnostics segment to decline 7% in 2022, driven by falling demand for COVID-19 tests.

Company Profile

Abbott manufactures and markets medical devices, adult and pediatric nutritional products, diagnostic equipment and testing kits, and branded generic drugs. Products include pacemakers, implantable cardioverter defibrillators, neuromodulation devices, coronary stents, catheters, and infant formula, nutritional liquids for adults, and immunoassays and point-of-care diagnostic equipment. Abbott derives approximately 60% of sales outside the United States.

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

AXA World Funds – Global Factors – Sustainable Equity I Capitalisation EUR

Rosenberg Equities, the quantitative unit of AXA Investment Managers, manages this strategy and has a long history of systematic and factor-based investing. CIO Gideon Smith leads this strategy and is supported by large securities and ESG research teams, internally and from the wider AXA IM stable. The team undertakes consistent research with slow incremental improvements, rather than the frequent tinkering of typical quantitative strategies. We think this line-up is well-resourced for the approach taken. Incoming CEO Paul Flavier has added some structure with Rosenberg as the broader AXA IM group continues to reshape itself with numerous reshuffles, both in personnel and operationally, over the past few years including its ESG operation. At this stage, it appears these changes have not seeped into Rosenberg which does not appear to have incurred any negative impacts.

We are comforted by the depth and well-documented process at Rosenberg but are watchful of the impact of the parent and its requirements of its subsidiaries. Using the MSCI World Index, this fund ranks each stock based on low volatility and quality factors. The shop seeks diversity by reducing mega-cap exposure using a proprietary weighting mechanism to give a slightly higher small- and mid-cap bias. Rosenberg also applies a machine learning tail risk filter to avoid negative surprises. Finally, although not an afterthought, an ESG component is applied which excludes certain industries entirely and then over- or underweights the remaining 300-600 stocks based on their qualitative ESG scores.

Performance asymmetry has been strong since the inception of the strategy in 2013 with index beating returns coupled with an attractive 80% downside capture ratio, which has become even lower during recent stressed periods. The rally of low-quality, high-volatility stocks in late 2020 was hurtful but Rosenberg’s approach over the long term offers a simple yet effective systematic approach to global equities with significant ESG considerations.

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Expert Insights Shares

Bank of Nova Scotia Revenue Growth

Its domestic operations are more concentrated in mortgages and auto lending, with leading market share in autos. The bank has been expanding its domestic wealth operations significantly with its acquisitions of MD Financial and Jarislowsky Fraser, making it the third-largest active manager in Canada. The bank has also been making multiple acquisitions in its Latin America footprint as it attempts to consolidate better share within the area.

The international exposure gives the bank the potential for higher growth and return opportunities compared with peers, but it also exposes the bank to more risks. While Latin America has been more stable in the past decade, there are risks that this may not continue. A return to political instability, higher credit losses, and inflation arguably all have higher likelihoods in these emerging markets than for Canada. The unique risks surrounding Latin America’s bounce back from COVID-19 are also worth considering.

After numerous acquisitions, the bank is in the middle of rationalizing its many back-end systems and improving efficiency bankwide. The bank’s original goal was to have an efficiency ratio of 50% by the end of 2021; however, we think this will be delayed, given the less positive economic backdrop caused by COVID-19. We like the bank’s digital efforts. While all banks in Canada are engaged in similar ongoing investments, Scotiabank has been spending the most on its technology and communication expenses. We think these efforts will ultimately pay off in the form of improved operating efficiency, customer engagement, and internal sales coordination. This leads us to believe that returns on tangible equity near 15% are sustainable over the longer term for the bank.

Bank of Nova Scotia is a global financial services provider. The bank has five business segments: Canadian banking, international banking, global wealth management, global banking and markets, and other. It offers a range of advice, products, and services, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets. The bank’s international operations span numerous countries and are more concentrated in Central and South America.

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

BlackRock Global Funds – Asian Growth Leaders Fund A2 USD

The strategy is comanaged by Emily Dong and Stephen Andrews. Dong has been on the roster since the strategy’s 2012 inception alongside previous comanager Andrew Swan, who unexpectedly left the firm and was replaced by Andrews in April 2020. Andrews has 23 years of industry experience, albeit mostly on the sell-side prior to joining BlackRock in 2017. His first portfolio management stint came in April 2018 and his limited portfolio management experience was apparent during our meetings. Dong, who has 18 years of investment experience and 11 years of firm tenure, brings some continuity amid the team change. That said, while she has contributed to the strategy’s solid track record in the past, the views she provided during our meetings have tended to be undifferentiated and we have yet to build conviction on the collaboration between the comanagers.

Our confidence is further dampened by the ongoing instability within the 36-member investment team, which has notably lost several senior portfolio managers and country experts in recent years. The strategy continues to follow a style agnostic approach that combines top-down and bottom-up research, with the aim of outperforming in different market environments. After determining which style factors or sectors to rotate into, the comanagers leverage the fundamental analysts to build a concentrated 30- to 60-stock portfolio.

This is an index-agnostic and high-conviction offering compared with the team’s core Asian equity mandate BGF Asian Dragon, and management has used the flexibility to make drastic short-term position changes to reflect the team’s top ideas. While the approach is reasonable, it depends much on the managers’ intuition and experience in navigating the market, and we are sceptical of the comanagers’ ability to execute the strategy and add value on a consistent basis. Overall, the strategy does not stand out as an attractive option for investors looking for Asia ex Japan equity exposure.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Candriam Equities L Biotechnology Class L USD Cap

Rudi van den Eynde is among the most seasoned investors in the biotechnology sector. His track record on Candriam Equities L Biotechnology spans over more than two decades. He navigated the fund through periods where biotechnology stocks were unpopular and when they became red-hot. His experience in assessing innovations and market potential is invaluable to the fund.

He receives support from a dedicated and growing cast. Comanager Servaas Michielssens started as analyst in 2016 and assumed portfolio manager responsibilities in 2019. Further support comes from three recently hired analysts and a diverse group of external advisors and industry experts.

While we welcome the additional resources given the complexity and growing number of listed biotechnology companies, we also note that team dynamics changed and the effectiveness of the new members is unproven. Keyperson risk remains high in our view, while their workload is considerable–managing two other strategies that have some overlap. The process rests on a solid foundation of thorough research of clinical data. It is well structured and effectively balances the significant opportunities offered by the industry with the binary outcomes of many biotech ventures and the associated volatility of their stock price.

The managers run the fund with a cautious mindset, diversifying the portfolio over a range of disease types, market caps, and clinical trial stages. Although liquidity is not a concern, the substantial rise in assets for this fund and the oncology fund, which have 36 holdings in common per April 2021, needs to be monitored. Candriam would consider soft-closing the biotechnology fund when combined assets reach USD 5 billion, which leaves about 20% of spare capacity.

Despite uninspiring performance over the recent 18-month period, the strategy’s track record remains compelling over longer horizons. The fund’s R USD Cap share class has beaten both the category average and Nasdaq Biotechnology Index over various periods.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

Categories
Technology Stocks

BorgWarner’s annualized revenue growth that exceeds global vehicle demand

× We think BorgWarner’s economic moat sources derived from powertrain intellectual property and switching costs are misunderstood. The market, in our view, has valued shares as though revenue declines long term on shrinking demand for internal combustion engines, despite increasing penetration in ICE, exposure to globally popular sport utilities, and electrified powertrain growth potential.

× We forecast annualized revenue growth that exceeds global vehicle demand growth by 2-4 percentage points.

× $2.0-$2.4 billion booked net new business backlog through 2021, implies 5-6% organic CAGR.

× EBITDA margin has had a high, low, and median of 17.2%, 9.7%. and 16.7%, respectively. We assume a 15.0% normalized sustainable midcycle EBITDA margin. Investors would have to believe a 12.4% midcycle EBITDA margin for our model to generate a fair value equivalent to the sell-side consensus price target.

× In our opinion, the market values BorgWarner as though fundamentals are in permanent decline, giving no credit for the company’s economic moat in powertrain technologies and consistent ROIC generation above cost of capital.

Company Profile

BorgWarner Inc. provides solutions for combustion, hybrid, and electric vehicles worldwide. The company’s Engine segment offers turbocharger and turbocharger actuators; eBoosters; and timing systems products, including timing chains, variable cam timing, crankshaft and camshaft sprockets, tensioners, guides and snubbers, front-wheel drive transmission chains, four-wheel drive chains, and hybrid power transmission chains. It also provides emissions systems, such as electric air pumps and exhaust gas recirculation (EGR) modules, EGR coolers and valves, glow plugs, and instant starting systems; thermal systems products comprising viscous fan drives, polymer fans, coolant pumps, cabin heaters, battery heaters, and battery charging; and gasoline ignition technologies.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Daimler AG attractive prospects in the automotive industry

× We also believe the market has discounted the stock for higher investment needed in industry disruptive technologies, including mobility services, autonomy, and powertrain electrification, which our fair value already takes into consideration.

× During the past 10 years, Daimler’s EBIT margin has had a high, low, and median of 8.8% (2016), negative 2.9% (2009), and 6.9%. We model Stage I peak EBIT margin at 7.0%, which represents a 180-basis-point contraction from the 10-year high.

× Our margin assumptions decline in the last two years of our Stage I to our normalized sustainable midcycle assumption of 5.9% in year five. Our midcycle assumption represents a 100-basis-point contraction versus Daimler’s 10-year 6.9% historical median.

× Despite our assumptions for significant margin pressure, our DCF model still generates a EUR 85 fair value estimate that represents 63% upside to the EUR 52 consensus price target and 74% upside potential versus the current market valuation.

For over 100 years, Daimler shares have been the investment in the inventors of the automobile. Based on the expected market development and the current assessments of the divisions, Daimler continues to anticipate Group unit sales, revenues and EBIT in 2021 to be significantly above the prior year’s level. The current worldwide supply shortage in certain semiconductor components affected deliveries in the first quarter. Daimler anticipates that this shortage could further impact sales in the second quarter. Although visibility is limited at present, Daimler assumes some recovery in the third and fourth quarter.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Shares Technology Stocks

Delphi Technologies largest product group is Fuel injector technology

× Fuel injector technology is currently Delphi’s largest product group. This represents a risk as manufacturers switch to smaller engines with fewer cylinders.

× Even so, the growth potential for Delphi’s electric and electronic powertrain products is substantial and represents margin expansion potential from software-based applications. We think Delphi revenue will grow at 1-3 percentage points above our long-term forecast for global light vehicle demand.

× We assume a 15.5% normalized sustainable midcycle EBITDA margin, 160 basis points below 17.1% historical 10-year high but 50 basis points above the 10-year median owing to more favorable product mix.

× To force our DCF model’s fair value to equal the $22 consensus price target, investors would have to believe a 10.0% midcycle EBITDA margin. To reach the market price, the midcycle EBITDA margin would have to be 8.7%, 80 basis points less than the 10-year historical low.

Delphi Technologies, a spinoff from Delphi Automotive, provides advanced vehicle propulsion solutions through combustion systems, electrification products and software and controls for global automotive, commercial vehicle and aftermarket customers.

DLPH Stock Summary

  • The capital turnover (annual revenue relative to shareholder’s equity) for DLPH is 27.74 — better than 98.99% of US stocks.
  • DLPH’s went public 2.83 years ago; making it older than merely 8.53% of listed US stocks we’re tracking.
  • Equity multiplier, or assets relative to shareholders’ equity, comes in at 14.76 for Delphi Technologies PLC; that’s greater than it is for 97.12% of US stocks.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

Categories
Dividend Stocks Philosophy Shares Technical Picks

AusNet Services Posts Good result

Reported EBITDA rose 6% to AUD 662 million. Adjusted EBITDA rose 7% to AUD 627 million, tracking slightly ahead of our full-year forecast mainly because of higher-than expected electricity demand. More people working from home benefited volumes and saw the firm earn AUD 21 million above its regulatory cap. This will be returned to customers via lower tariffs mainly in fiscal 2022. As AusNet is regulated, there is no lasting impact on our longer-term earnings forecasts or valuation from demand fluctuations.

Electricity distribution performed well, with revenue up 4% to AUD 502 million and adjusted EBITDA up 11% to AUD 288 million. The strong result benefited from tariff increases and stronger residential demand, but the outlook isn’t as rosy. This asset undergoes a regulatory reset in early 2021, which will likely reduce allowed returns on equity to under 5% for the next five years, from over 7% currently. We forecast average annual revenue growth of just 1% over the next five years, despite ongoing reinvestment and growth in regulated asset base. Gas distribution also benefited from tariff increases and stronger residential demand, helping revenue increase 4% to AUD 149 million and adjusted EBITDA increase 8% to AUD 117 million. The next regulatory reset for the gas network is in early 2023. Overall, we expect revenue to grow at about 3% for the next two fiscal years, before resetting about 5% lower from 2023.

EBITDA in the electricity transmission network rose 1% to AUD 181 million. We forecast revenue grows 1% per year for a couple of years, before falling a few per cent in fiscal 2023 following the next regulatory reset in 2022. The main growth opportunity for AusNet is transmission connections to new wind and solar farms and between states. Some will be unregulated, some regulated. All will be capitalintensive, but we think the firm can fund without an equity raising.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.